Bare trusts exempt from new reporting rules for 2023, CRA says

March 28, 2024

The Canada Revenue Agency says it won’t require Canadians with bare trusts to adhere to complex new tax-reporting requirements for the year 2023, after recent legal amendments meant to increase transparency around trusts caused an uproar among both many affected taxpayers and tax professionals.

The announcement, which came just days before this year’s April 2 deadline for filing trust returns, means tax filers won’t have to report bare trusts this year unless the agency makes a direct request for the files.

The new rules have been lambasted for including onerous requirements to disclose information to the CRA that critics said were particularly hard to comply with in the case of bare trusts, which are often informal arrangements that aren’t documented in writing.

In a statement online the tax agency said it was exempting bare trusts in recognition that the new reporting requirements have had “an unintended impact on Canadians.”

Chartered Professional Accountants of Canada, which represents the profession at the national level, had been among the groups asking the CRA to push back the deadline for filing bare trust returns, said John Oakey, vice-president of taxation at the organization.

Instead, the tax agency used its administrative powers to waive the filing requirements entirely for bare trusts for the 2023 tax year, Mr. Oakey said, calling the move “a much better outcome” compared with a deadline extension.

A trust is a legal relationship in which someone called a trustee holds property for another person known as the beneficiary. In a bare trust, the trustee can only act on the instruction of the beneficiaries.

Accountants and tax lawyers warned that many ordinary, poorly documented arrangements used by Canadians to manage family finances constituted bare trusts that would be caught in the new rules. In many cases, those affected by the new rules never formally or intentionally set up a trust.

Common scenarios involve people who hold title to their adult children’s home because they co-signed their mortgage and those who have their names on their elderly parents’ bank or investment accounts.

This tax season was supposed to be the first time in which Canadians would have to file what’s known as a T3 Trust Income Tax and Information Return for bare trusts, which were previously exempted from having to report information to the CRA.

Part of the difficulty of complying with the reporting requirements stemmed from the fact that assessing whether a bare trust exists can involve extensive information gathering and complex interpretations of common law, according to many tax advisers.

A March online survey conducted by The Globe and Mail through the Carrick on Money newsletter shows the new reporting rules for bare trusts were forcing many taxpayers to spend hundreds – if not thousands of dollars – in accounting and legal fees in addition to routine tax-preparation costs.

While the CRA’s announcement is good news, showing the government listened to sustained and increasing criticism, the fact that it came so close to the filing deadline means both individual and corporate taxpayers have already spent millions of dollars in fees and expenses, said Allan Lanthier, a prominent tax expert and retired partner at EY.

“The Minister of Finance should take a hard look at this fiasco, and develop a new, consultative approach to legislative drafting so that these types of mistakes don’t happen again in future,” Mr. Lanthier said via e-mail.

Kevin Burkett, partner at Burkett & Co. Chartered Professional Accountants, said the late notice would punish conscientious taxpayers and tax professionals who had already submitted bare-trust returns. “Your most honest, ethical taxpayers and practitioners have probably made their bare trust filings already,” he said.

The trust reporting requirements had also resulted in significant extra costs and workloads for accounting firms, according to several tax professionals who spoke to The Globe.

To help Canadians comply with the rules, CRA had previously said it wouldn’t apply penalties for 2023 bare trust returns submitted after the deadline, except in blatant cases of gross negligence. On Thursday, the agency went further by exempting bare trusts entirely for the 2023 tax year.

The move represents the second time in four months that the federal government has walked back new tax-filing requirements. In November, Ottawa announced it would largely scrap reporting obligations for Canadians stemming from the Underused Housing Tax (UHT). The measure, which is meant to discourage foreign real estate investors from leaving residential property underused or vacant, also affects many Canadian and permanent resident homeowners and some Canadian corporations.

Both in the case of trusts and with the UHT, the primary impact of the recent tax changes on Canadians is to create new obligations to disclose information to the CRA, rather than to introduce new taxes.

On bare trusts, the tax agency said in the statement announcing the exemption for 2023 that it will work with the Department of Finance over the coming months to clarify its guidance on this filing requirement. It also said it will share with Canadians further information as it becomes available.

Mr. Oakey said he hopes those consultations will produce rules that, while satisfying Ottawa’s goal of boosting transparency around trusts, are also workable.

“Let collectively come up with rules that actually capture that information without being so broad in scope that they’re capturing useless information.”

Why this money manager is buying Intact and selling Choice Properties REIT

April 12, 2024

Money manager Kevin Burkett isn’t waiting to see if the economy has a soft or hard landing, or how many interest-rate cuts could come this year. Instead, his four-person investment team at Burkett Asset Management Ltd. looks to buy high-quality companies that are out of favour or misunderstood by investors in the short term, and have the potential to do well over the long term.

“Our firm is small and independent, which we think gives us an advantage because we can be more nimble in making investment decisions,” says Mr. Burkett, partner and portfolio manager at the Victoria-based firm, which oversees about $340-million in assets.

The firm’s balanced portfolio, which includes an approximately 60-40 split of stocks and bonds, was up 13.2 per cent over the past 12 months. Its three-year annualized return was 7.6 per cent, while its five-year annualized return was 8.6 per cent. The performance is based on total returns and gross of fees as of March 31. (Fees range from 0.40 per cent to 1.25 per cent depending on the size of a client’s portfolio.)

The Globe and Mail spoke with Mr. Burkett recently about his investing style and what he’s been buying and selling.

Describe your investing style.

We strive to own a portfolio of companies that we consider higher quality than their peers. The two most important characteristics we look for are companies with long-term earnings growth prospects and shareholder-friendly capital management. These businesses provide long-term visibility for our model forecasts and resilience during down-market periods. The challenging part is acquiring those businesses at attractive prices. To accomplish this, we look for businesses with catalysts for positive change that may be currently out of favour, either owing to investor misconception or market overreaction about a stock in the short term.

What does your asset mix look like?

We like public stocks and bonds. We don’t invest in private or alternative assets. Those products are often more expensive and complex, which doesn’t always translate into higher returns. We’re always fully invested and try to have as little cash as possible. We consider bonds as our ‘safe bucket’ and source of funds to rebalance portfolios opportunistically as things come under pressure or as equity markets run higher. Right now, we have a heavier weight on shorter-term bonds. We customize the stock-and-bond mix depending on our clients’ preferences and risk tolerance.

What have you been buying?

We bought insurance company Intact Financial Corp. IFC-T +0.35%increase in the fourth quarter of last year and have been adding to it recently. The insurance sector, particularly here in Canada, is moving through a period of consolidation, and Intact has demonstrated a history of successful acquisitions. It’s acquiring smaller players across Canada at reasonable valuations and showing strong capital generation while remaining disciplined about deployment. Insurance may be a crummy business to be a customer of, given rising prices, but it’s a great business to invest in because a few key players dominate it.

More recently, we’ve been buying Ashtead Group PLC ASHTY -1.12%decrease, a British industrial equipment rental company with significant exposure to the U.S. and North America. It’s the second-largest equipment rental company in the U.S. We see it as having scale, expertise and experience and being able to win some mega projects in manufacturing and infrastructure. We consider it a defensive name while benefiting from the growing need for equipment it rents.

What have you been selling?

Choice Properties REIT CHP-UN-T -0.91%decrease is a stock we exited recently after owning it for about a year. We originally liked Choice for its grocery-anchored exposure. While this real estate category has outperformed others, as we had expected, the market now well understands Choice’s defensive nature and diversified tenant mix. Our growing concern about the impact of higher interest rates on development activities and fewer identifiable positive catalysts in the near term led us to redeploy those assets to where we felt were better opportunities.

We also recently exited Trane Technologies PLC TT-N -1.04%decrease, a large [heating, ventilation and air conditioning] company based in Ireland. It does a lot of business in the U.S. We did well on the stock, but our investment thesis ran its course, so we decided to put the money to work elsewhere.

Name one stock that you wish you hadn’t sold, and why?

MercadoLibre Inc. MELI-Q -1.96%decrease, one of the largest e-commerce platforms in Latin America, is a stock we wish we hadn’t sold. We started buying the stock in September, 2017. Although it was doing well, foreign competitors such as Amazon.com Inc. AMZN-Q -1.68%decrease and Alibaba Group Holding Limited BABA-N -0.94%decrease had more established logistics networks.

MercadoLibre was rapidly growing due to its free shipping strategy, and analysts thought it could quickly lower the program’s costs so the drag on margins would recede. That wasn’t our expectation. We thought building a logistics network to enable efficiencies and cost reductions would be a costly multiyear process. We concluded it was overvalued and sold it in August, 2018, at a nice profit.

However, MercadoLibre was able to reduce the costs associated with its free shipping service more quickly than we expected. The stock has since increased by more than 300 per cent in Canadian dollars. We missed the broader impact of the global shift to e-commerce, which greatly outweighed our concerns about margin pressure.

What did you learn from that?

Successful investment teams talk about their mistakes at least as much as their successes. We learned that you can spend a lot of time and energy and still make the wrong decision. Today, we’re more careful about focusing our time so we don’t get lost in details while worrying about one issue. For every company we analyze, we make sure to understand the broader, important trends that could alter how the company operates.

This interview has been edited and condensed.

S&P/TSX composite makes moderate gain after rate decision, U.S. markets also rise

March 6, 2024

Canada’s main stock index posted modest gains Wednesday after the Bank of Canada continued to hold its key lending rate steady, while U.S. markets also moved higher, recovering some of Tuesday’s losses.

The S&P/TSX composite index closed up 68.03 points at 21,593.96.

In New York, the Dow Jones industrial average was up 75.86 points at 38,661.05. The S&P 500 index was up 26.11 points at 5,104.76, while the Nasdaq composite was up 91.96 points at 16,031.54.

Central bank officials on both sides of the border spoke Wednesday about the need for caution ahead of highly anticipated interest rate cuts.

The Bank of Canada held its interest rate steady at five per cent, a move that surprised practically nobody, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

However, he said the commentary from Bank of Canada governor Tiff Macklem was more hawkish than he expected, as the governor said it’s still too early to consider lowering the policy interest rate.

“With inflation still close to three per cent and underlying inflationary pressures persisting, the assessment of governing council is that we need to give higher rates more time to do their work,” said Macklem.

While inflation is receding and the overall economy has weakened more than that of the U.S., Canada’s housing market remains strong, said Burkett.

Macklem is likely concerned that talking about rate cuts too soon “will spur on the Canadian housing market, which really hasn’t reacted the way anyone would have guessed, given the magnitude and rapid nature of the barrage of rate hikes,” he said.

Meanwhile, U.S. Federal Reserve chair Jerome Powell’s testimony before Congress seemed more dovish on cuts than Macklem’s, said Burkett.

Powell said the Fed needs more confidence inflation is moving sustainably toward its target before it can start cutting rates.

Despite the U.S. economy’s strength compared with Canada, Burkett thinks the Fed could cut rates before its northern neighbour because of the differences in its housing market, where mortgage terms are significantly longer.

“I think there’s more sensitivity in our housing market because we didn’t see the same correction that they saw in the U.S. during 2008,” he added.

Wednesday saw fresh data on U.S. job openings, which were relatively flat at the end of January compared with a month before. It also saw the Fed’s latest report on business and economic conditions, which said economic activity increased slightly since early January while there were signs of easing in the tight labour
market.

The Canadian dollar traded for 73.92 cents US compared with 73.63 cents US on Tuesday.

The April crude oil contract was up 98 cents US at US$79.13 per barrel and the April natural gas contract was down three cents at US$1.93 per mmBTU.

The April gold contract was up US$16.30 at US$2,158.20 an ounce and the May copper contract was up three cents at US$3.88 a pound.

— With files from The Associated Press

Your CPP questions answered: If you’re receiving survivor benefits, is there a good time to take your own CPP?

February 20, 2024

As part of this ongoing series, we invite readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and find experts to answer them. This week, we asked Kevin Burkett, tax partner at Burkett & Co. Chartered Professional Accountants in Victoria, to answer some questions about survivor benefits:

What’s the difference between a death benefit and a survivor benefit?

The death benefit applies in cases in which the deceased made contributions to the CPP that meet certain requirements around years of contributions. It’s a one-time payment of $2,500 that can be applied for immediately after the contributor’s death, paid to their estate or, in cases in which there’s no estate, it can go to the person paying for funeral expenses, the surviving spouse or the next-of-kin, in that order.

The survivor’s pension is a monthly pension paid to the surviving spouse or common-law partner and, in cases in which the survivor is 65 or older, results in a 60 per cent entitlement. If the surviving spouse is under 65, they receive a base amount of $227.58 per month, which is the flat rate portion for 2024, plus 37.5 per cent of the deceased contributor’s retirement pension entitlement. Note that if the surviving spouse is already receiving a CPP retirement pension, the total of these amounts is limited to certain thresholds.

If you are receiving survivor benefits, is there a good time to take your own CPP? I was 62 when my husband passed away and I started receiving survivor benefits then. I tried to research the best time for me to take my own CPP, and it’s all very confusing. No one seems to have a good, clear answer.

It is very confusing. The best choice will depend on your specific situation. In addition to all the usual considerations of when to start your own retirement pension, you need to be aware of the overall limit for someone receiving a combined survivor’s and retirement pension. In some cases, if this limitation affects you, it may be best to defer receiving your own retirement benefit to obtain the increased retirement entitlement at 70. If you call Service Canada, a representative can provide you with the exact numbers of your combined survivor pension and retirement benefit if you decide to start now. You could then compare this to the option of allowing your retirement pension to grow by deferring it.

Can you tell me what the CPP maximum combined survivor and retirement pension is if the deceased or the survivor starts collecting at 70? Also, what is the impact if both spouses are over 65 and neither is collecting when one of them passes away?

The 2024 maximum combined survivor’s and retirement pension, as shown on the Service Canada website, is $1,375.41. This limit is for a surviving spouse who starts their own retirement pension at 65. If the surviving spouse defers their CPP benefits until 70, this limit is increased by 42 per cent. If both spouses are over 65, and neither is collecting the CPP when one of them passes away, the surviving spouse’s combined survivor and retirement pension will be subject to the maximum limit at that time, after taking into account the 0.7 per cent per month increase that applies by deferring the start of the retirement pension after 65.

Markets continue recovery from mid-week selloff as S&P 500 notches new all-time high

February 15th, 2024

Canada’s main stock index gained 1.6 per cent on Thursday, led by strong gains in the energy sector, while U.S. markets also rose, with the S&P 500 notching a new all-time high.

The S&P/TSX composite index closed up 333.29 points at 21,222.69.

In New York, the Dow Jones industrial average was up 348.85 points at 38,773.12. The S&P 500 index was up 29.11 points at 5,029.73, while the Nasdaq composite was up 47.03 points at 15,906.17.

Mixed messages from inflation readings are driving short-term market volatility, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

On Tuesday, hotter-than-expected U.S. CPI numbers drove markets into a selloff, but much of that was recovered in the following days.

“The numbers themselves aren’t bad. I think that the issue is people’s expectations, in particular at the end of December, had become so aligned to this view that we would see imminent and steep rate cuts,” said Burkett.

“And what we’ve seen in the last two months, in particular, is people start to think more realistically about the timing with which we can expect policymakers to begin to cut rates.”

Right now there’s very little chance that either the Bank of Canada or the U.S. Federal Reserve will start cutting interest rates in March, said Burkett. As well, expectations for how many cuts the entirety of 2024 will bring have come down significantly in recent weeks, he said.

“The challenge is that with inflation stubbornly elevated, it’s awfully hard for monetary policymakers to justify cutting rates and risk undoing (the effects of) the rate hikes of the last 12 to 24 months,” he said.

Thursday saw the latest retail sales report in the U.S., with sales in January weakening by more than expected, which could remove some pressure on inflation.

Recent earnings reports in Canada have highlighted the disparity between companies that have more pricing power — like insurance or grocery companies — and those more on the discretionary side, said Burkett.

Manulife’s stock price soared by almost nine per cent Thursday after it reported higher earnings in the latest quarter.

Meanwhile, Canadian Tire reported a drop in profits in the latest quarter amid tougher economic conditions and softer consumer spending, though its stock price didn’t move significantly Thursday.

The Canadian dollar traded for 74.11 cents US compared with 73.80 cents US on Wednesday.

The April crude oil contract was up US$1.23 at US$77.59 per barrel and the March natural gas contract was down three cents at US$1.58 per mmBTU.

The April gold contract was up US$10.60 at US$2,014.90 an ounce and the March copper contract was up six cents at US$3.76 a pound.

— With files from The Associated Press

“It’s clearly not an investment,” advisors weigh in on the impact of US bitcoin ETFs

How advisors are answering client questions about cryptocurrency following the SEC approval of bitcoin ETFs

January 17, 2024

While Canadians have had access bitcoin ETFs since the pandemic, the approval of US-listed bitcoin ETFs by the SEC last week was still meaningful news on this side of the border. The access US investors now have to bitcoin-tracking ETFs was predicted to make a meaningful impact on demand for the cryptocurrency.

Following that announcement, those new US ETFs saw billions of dollars in trading values. However, the price of Bitcoin has pulled back meaningfully from the highs it hit in the leadup to last week. As big news in the US drums up consumer interest in bitcoin worldwide, how are Canadian financial advisors viewing the currency and what are they now telling their clients?

“I would say that insofar as you define an investment as one which generates income or has the potential to generate income I think it’s clearly not an investment in that context,” says Kevin Burkett, portfolio manager at Burkett Asset Management. “Whereas shares issued by a company or bonds issued by a company or government derive their value from the ability to generate some underlying cash flow somewhere, cryptocurrencies do not have that.

“That kind of relegates bitcoin to the category of what I would call a collectible. It’s finite and so has value derived by the relative forces of supply and demand the way art, or commodities, or other collectibles derive value. For me, that’s a very key distinction.” 

While Burkett says he is not “anti-bitcoin” and sees a great deal of interest in the technology, he thinks the fact that bitcoin has been marketed as an investment has created a great deal of confusion among investors. Accessing bitcoin through investment vehicles like ETFs, too, has popularize the view of bitcoin as an investment. While it may appear like a semantic distinction, Burkett believes that because bitcoin does not meet his definition of an investment it’s not something he would elect to put in his clients’ accounts.

Francis Sabourin may not share Burkett’s hardline delineation between what is and is not an investment, nevertheless he treats bitcoin and other cryptocurrencies as a purely speculative play. The director of wealth management and portfolio manager at Francis Sabourin Wealth Management of Richardson Wealth sees the approval of ETFs as a victory for bitcoin and cryptocurrency advocates, nevertheless he ensures his clients are aware of the speculative nature of that market.

“I tell my clients it’s not a proven investment. It’s very speculative. It’s sexy, it’s interesting to know, but it’s not yet mature in terms of investment,” Sabourin says. “That’s because there’s no intrinsic value by itself. Gold has intrinsic value, dollars have intrinsic value. You can do something with your gold bar, you can melt it down and make jewellery, but with bitcoin what else are you going to do with it? Is it Monopoly money or what?”

Sabourin says that when clients come to him asking about bitcoin or other cryptocurrencies, he expresses these concerns, says they’re free to try out an investment but emphasizes the speculative nature of bitcoin.

Burkett shares that view, likening bitcoin’s value to that of baseball cards of beanie babies. While many bitcoin advocates are celebrating the arrival of US ETFs, Burkett notes that it may impact the original intent of the cryptocurrency as a medium of exchange without intermediaries. The introduction of products like ETFs will bring more intermediaries into the space and bring in greater regulatory attention. That may, in turn, leave bitcoin and other cryptocurrencies in a space where they aren’t used as currencies, and trade more on psychology and speculation than any underlying value creation.

As advisors tackle questions about cryptocurrency from their clients, Burkett believes they should begin by contextualizing things like bitcoin in what they know about investments as advisors. They can draw their own lines based on what they’ll include in their practice and what they wont.

“Be careful, it’s okay to say that you don’t know about something,” Burkett says. “There’s a lot of things that you can own within the universe of what is an investment. To understand where you have specialist knowledge and where you don’t have specialist knowledge, that’s how you can make sure that you have a high chance of adding value as opposed to taking value away. I think advisors should not be knew to these sorts of questions, we’re talking about bitcoin today but five years ago it might have been marijuana stocks.

“In the decades I’ve been around I’ve seen some of these topical investment subjects come and go. Over the years I’ve become more outspoken when clients ask about something that doesn’t meet the quality filters we have, and I think clients really appreciate it when you give them your honest opinion about something that doesn’t make sense.”

Markets reverse in mid-afternoon slump, TSX loses more than one per cent Wednesday

December 20, 2023

Canada’s main stock index lost more than one per cent on Wednesday in a broad-based slump and U.S. markets also fell, as stocks took a dramatic turn in the later half of the afternoon.

The sudden weakness didn’t seem to be sparked by a particular news event, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

But after an “incredible run” for markets over the past couple of months as rate expectations shifted, investors are likely taking a cautious step back, he said.

“There’s a lot of nervousness around the rally of the last 30 days.”

The S&P/TSX composite index closed down 238.82 points at 20,600.81.

In New York, the Dow Jones industrial average was down 475.92 points at 37,082.00. The S&P 500 index was down 70.02 points at 4,698.35, while the Nasdaq composite was down 225.28 points at 14,777.94.

Markets closed out their seventh straight winning week on Friday.

The U.S. Federal Reserve has continued to maintain a cautious front, Burkett said, even as markets are calling for more cuts than the central bank has said it expects to take.

“Monetary policymakers don’t want to show their hand because that diminishes the impact of the decisions they make at their meetings,” he said.

Last week, the Fed announced it would hold its benchmark rate steady in the last policy announcement of 2023. The central bank also signalled it expects to make three cuts of a quarter-point in 2024.

The Bank of Canada also recently held its key rate steady. In the summary of its deliberations released Wednesday, central bank officials agreed the odds of another hike have decreased with recent data pointing in the right direction.

The question in the U.S. and Canada heading into 2024 isn’t really whether central banks will raise rates again, said Burkett.

“The question is, how quickly will they start cuts? And how deeply will they cut from here?” he said.

New data in the U.S. showed consumer confidence improved in December, by more than economists expected. Sales of previously occupied homes in November also beat expectations.

Wednesday also saw some disappointing earnings reports from U.S. companies including FedEx.

The Canadian dollar traded for 75.01 cents US compared with 74.94 cents US on Tuesday.

The February crude oil contract was up 28 cents at US$74.22 per barrel and the January natural gas contract was down five cents at US$2.45 per mmBTU.

The February gold contract was down US$4.40 at US$2,047.70 an ounce and the March copper contract was up a penny at US$3.91 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Dec. 20, 2023.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

S&P/TSX composite down, led by energy and base metals; U.S. markets also in the red

December 4, 2023

TORONTO — Canada’s main stock index moved lower on Monday, dragged down by losses in energy and base metals, while U.S. markets also ended the day in the red, led by weakness on the Nasdaq.

After a strong November as rate hike pressures eased, with some of the big tech names posting strong performances, traders are taking stock of the sentiment shift, said Kevin Burkett, portfolio manager at Victoria-based Burkett Asset Management.

“I think what we’re just seeing is a bit of a short-term reversal of some of the big moves we’ve seen in the last couple of weeks,” he said.

A similar shift is evident in the bond market, added Burkett.

“Some of the rapid fall in rates that drove bond prices higher for the month of November … it seems some of those have kind of given back a little bit today.”

The S&P/TSX composite index closed down 42.66 points at 20,410.21.

In New York, the Dow Jones industrial average was down 41.06 points at 36,204.44.The S&P 500 index was down 24.85 points at 4,569.78,while the Nasdaq composite was down 119.54 points at 14,185.49.

Investors are placing bets on rate cuts that Burkett thinks are too optimistic, with some calling for cuts as soon as the first quarter of 2024, he said.

“To me, that seems crazy, given all the things that the Fed and Bank of Canada have been saying over the last year.”

For cuts to come as soon as some currently expect them to, the economy would likely have to be at the start of a hard landing, said Burkett.

He thinks those expectations will have to be pushed down the road moving into the new year.

The Bank of Canada’s upcoming rate decision Wednesday is all but certain to be a continuation of its pause, said Burkett. The U.S. Federal Reserve will hold its meeting the following week.

The Canadian dollar traded for 73.85 cents US compared with 74.04 cents US on Friday.

Oil prices continued to fall Monday amid renewed concerns about demand as the economy weakens, said Burkett.

The January crude oil contract was down US$1.03 at US$73.04 per barrel and the January natural gas contract was down 12 cents at US$2.69 per mmBTU.

The February gold contract was down US$47.50 at US$2,042.20 an ounceand the March copper contract was down 10 cents at US$3.84 a pound.

This report by The Canadian Press was first published Dec. 4, 2023.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

Rosa Saba, The Canadian Press

A bespoke approach to tax loss selling

Discretionary PM outlines how he approaches the practice year-round and highlights where he sees the greatest potential for gain in tax loss selling season

November 30, 2023

Tax loss selling often begins with a calendar reminder. Somewhere in November, advisors start poring over clients’ non-registered accounts looking for unrealized losses that can help alleviate a tax burden or offset a tax bill coming from any realized gains. It’s a bread-and-butter value add for advisors, using technical skills to manage a client’s taxes.

Kevin Burkett thinks there’s an opportunity to demonstrate that value year-round. The portfolio manager at Burkett Asset Management looks for opportunities to realize losses throughout the year. When he does that, however, he tries to take a more holistic view, seeing how this particular sale can fit into a client’s overall plan.

“The traditional approach is to say ‘let’s find stocks that have fallen the most, and sell those stocks over a year, and when you take that simplistic approach you are potentially missing out on a recovery in those companies’ shares,” Burkett says. “You want to have in your scope a view as to whether you want to remain invested in that company and hope they realize share price recovery. I wouldn’t say what we do is drastically different than the conventional approach. I think we just try to zoom in more and consider a broader range of factors to get the client the best outcome, and to show the client that we’re thinking about their situation in a pretty deep way.”

Burkett notes a few considerations his team keeps in mind around tax loss sales. Holding companies, for instance, may have very different fiscal years. Therefore he and his team make note of when any sales needs to happen within the context of a particular holding company’s setup.

The rules around capital losses are crucial, too. Investors must adhere to the superficial loss rule, wherein a security is sold by a person and a party affiliated with that person — such as their spouse or holding company — buys the identical security. As well, the same position can’t be entered within 30 years of its disposition. Burkett educates his clients on these rules, as they might re-enter the same position via their spouse’s account or a holding company out of fear of missing out on a gain.

Burkett also has to combat that FOMO when tax loss selling comes. He notes, however, that given the incredible diversity of similar ETFs now available on the market, he can exit certain positions at a realized loss, move into another position with similar overall exposure, and not trigger any violations of the rules. That can keep his clients participating in any potential share price recovery and improving their overall tax efficiency.

After a volatile few years on the market, Burkett sees the greatest potential for tax loss selling advantages in fixed income. After three years of negative total returns on most fixed income, there is a significant opportunity to exit positions at a loss while moving into positions with very similar overall exposures, risk ratings, and potentially more advantageous yields.

Higher yields on bonds, however, add to the interest income portion of a client’s tax exposure. Burkett thinks that tax-sensitive clients could actually benefit from some of the lower-yield bonds issued during 2020 and 2021, which are coming to maturity soon. Those bonds are currently trading at a discount, and between the outlook for broad improvement on the bond market and the likely return they will provide at maturity in the form of capital gains, they could be a way to realize a tax loss on fixed income positions now and shift some interest income tax bills over to the more efficient rates delivered by capital gains.

Burkett notes that sometimes the temptation to realize a loss for tax sale purposes can be great, but argues that if the right alternative product doesn’t exist for clients, it might not be right to exit that position. Advisors approaching tax loss selling need to be careful and mindful of how exiting a position at a loss, only to add the same position at a higher cost down the road will make them look.

“If you sell and realize a loss, and you don’t put that in the market, you might get lucky, but I don’t know if clients are going to give you credit. I think they will hold it against you if you get unluck,” Burkett says. “You’d hate to have a client statement that shows you sold a position and bought it back much more expensively, I think if you can point to what you did with the funds in the interim, and show that you continued to participate, that’s a better story for your client than simply saying ‘I left it as cash for the required 30 days and then bought the position back.’”

HISA ETFs might not be dead yet

OSFI ruling could impact yields, asset managers and advisors weigh in

November 1, 2023

The Office of the Superintendent of Financial Institutions (OSFI) announced yesterday they would be upholding a 100% liquidity requirement for high interest savings account (HISA) ETFs. Citing their core liquidity adequacy principles, OSFI will mandate that as of January 31st 2024 all banks and deposit-taking institutions will need to maintain “sufficient high quality liquid assets.”

Banks had largely maintained a 40% runoff rate on HISA assets before this ruling. By mandating a 100% liquidity requirement it is expected that these ETFs will pay a lower yield.

“We’re extremely disappointed by this ruling,” says Vlad Tasevski, Chief Operating Officer and Head of Product at Purpose Investments, which manages the Purpose High Interest Savings Fund at around $5.6 billion in AUM. “At the same time, I think we expect these offerings to still remain the most attractive option for cash investments, they will still offer a lot of value.”

What OSFI’s decision means now

Even though the new liquidity requirements are expected to impact the yield of these ETFs, Tasevski still views these products as competitive against other money market funds, traditional high interest savings accounts, and other forms of cash allocation. He argues that while the delta on yield between HISA ETFs and other money market funds might shrink, they still offer a greater degree of security from a risk standpoint. He believes that while this ruling may make the competitive landscape between HISA ETFs and other money market products more even, he thinks products like his can still attract assets.

The combination of low operating costs, relative stability, and high yields on cash made HISA ETFs very popular in recent years. According to National Bank Financial cash alternative ETFs like HISA ETFs grew their AUM to over $15 billion in 2022 and added another $6.9 billion so far this year. 

“About half a million Canadians own these funds, and many of them have been relying on the interest payments from these products to fund their ongoing living expenses. The fact that this yield is going to come down is unfortunately going to hurt Canadians,” says Raj Lala President & CEO of Evolve ETFs — which manages the High Interest Savings Account Fund at around $5.3 billion in AUM.

Lala expects that asset managers will now enter into a transitionary period for these products, determining what their rates will look like between now and the 31st of January, as well as what they will look like after. He says that the major asset managers behind HISA ETFs is Canada are working together in meetings with banks and regulators to secure the best outcome for their funds. Nevertheless, he does predict a drop in yield.

Who benefits from the OSFI decision?

Tasevski acknowledges that this decision from OSFI does benefit alternative cash strategies. Money market funds and bank high interest savings accounts may look more attractive to investors if yields on HISA ETFs do come down significantly. Nevertheless he emphasized that funds like his should remain attractive. At least one advisor agrees.

Evan Riddell, Principal and certified financial planner at Ridell private wealth management, part of IG private wealth management, says the decision actually makes HISA ETFs more attractive in his eyes. He has been using these funds for his clients almost since their inception and the Victoria, B.C., based advisor says that for his purposes a 100% liquidity requirement makes them even more useful.

“It’s making sure that these alternatives [to cash] are apples to apples and safe for clients, because clients aren’t using this as a long-term piece. They’re typically using this as a short-term savings vehicle, so making sure they have that 100% liquidity is absolutely paramount,” Riddell says. “The spread still seems to be pretty large, even if we saw these products coming down in yield a little bit as a result of this ruling, I expect the spread to be fairly substantial and in the interests of the client.”

Are alternative cash allocations more attractive?

Kevin Burkett, portfolio manager at Burkett Asset Management, sees the logic behind OSFI’s ruling given the meteoric rise of HISA ETFs among Canadian investors. He wonders, however, why so many Canadians have flocked to these products and argues that it largely comes down to a lack of easily available alternative options.

While headline interest rates have risen, traditional high interest savings accounts have lacked yields attractive enough to bring in capital. He expects, however, that when banks offer more competitive rates to seek deposits, there could be a structural shift away from these HISA ETFs. For his part, Burkett extolls the virtues of T-bills for his cash-like allocations.

“Why are people having to go to HISA ETFs to replicate returns they would get on T-bills issued by the Canadian government?” Burkett asks. “You don’t have to worry about what the underlying pool is invested in…I think what’s really important is that folks look through the ETF and understand what the holdings are because that’s what you’re really buying.”

Lala argues that from an underlying perspective these products remain viable and alternative. He believes that from a yield to liquidity to credit standpoint HISA ETFs like his remain ahead of other cash and cash alternative products.

What can advisors do now?

As advisors look at their HISA ETF allocations in the wake of this decision, Tasevski and Lala believe they should not make any immediate decisions. They argue for a ‘wait and see’ approach as asset managers work with banks to determine what rates on these products might be in future. The 100% liquidity rule won’t come into effect until January 31st of next year, and in the meantime asset managers are exploring all the options available to them.

“Sit tight,” Lala says when asked what advisors should do. “I feel confident that we’ll have some transitionary period for the next couple months were we expect the yield will be somewhere above overnight. On January 31st or February 1st that’s when you can kind of take a look at the yield on these products and compare them to what you can get elsewhere on the market.”